Bank Saver Update - Impact of Shutdown on Deposit Rates

Short term CD and online savings accounts continue to fall while longer-term CD rates continue their climb, even in the face of the budget standoff and threat of default. The rise in longer-term rates is good news and shows that bankers expect rates to continue to rise and consumers are demanding more yield to lock their money up for an extended period of time.

From one month ago, 12 month average CD rates decreased by two basis point from 0.351 to 0.349% APY. After increasing before the budget battle, average 3 year CD rates dropped from 0.715 to .714% APY. Five year average CDs continued their march upward, moving from 1.073% to 1.079% APY, up from their low of 1.049% APY in June. The biggest loser over the past month have been online savings account average rates, which fell from 0.681% to 0.664% APY. Online savings accounts have been the bright spot of the last couple of years, retaining relatively high rates even while CD rates crashed. Short term savings vehicles like online savings accounts and one year CDs continue to fall, showing that in the short-term, banks believe rates will stay low.

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The chart below shows the trend in average rates since October 2012.

Top Rate Recap

During this period, top savings and CD rates stayed pretty much status quo.

• Online Savings: GE Capital Bank retains the top spot at 0.90% APY.
• 1 Year CD: Nationwide Bank holds the top spot at 1.06% APY with a $100,000 minimum balance. GE Capital Bank is right below it with a 1.05% APY rate and a smaller $500 minimum balance.
• 3 Year CD: Pentagon Federal Credit Union has taken the top spot with a 1.51% APY CD. Last month, the best rate was 1.50% APY from Salem Five Direct.
• 5 Year CD: iGoBanking.com continues to offer a 2.05% APY CD.
• Rewards Checking: Hope Credit Union and Money One Federal Credit Union both have the top rewards checking rate of 3.01% APY for balances up to $10,000. Both credit unions are open to members from across the country.

It's possible to find even better rates at local banks and credit unions (especially for CDs). You can search for better local rates here.

Online Saving and CD Spread

The difference between average 1 year CD rates and average online savings rates continued to decline from the high it achieved in May 2013. On average, online savings account rates pay 0.315 percentage points more than 1 year CDs, up from 0.23 percentage points more at the beginning of last year but down from the spread's high of 0.344 percentage points in May. In addition to paying more than 1 year CDs, online savings rates pay almost the same as 3 year CDs. Despite the fact that online savings rates have lost some ground to 1 year and 3 year CDs, in a rising rate environment, it makes more sense to stay liquid with an online savings account than to lock money into a low rate CD. If the spread declines dramatically then this may be worth revisiting.

General rate environment

As I wrote on the eve of the government shutdown:

"The shutdown provides another tailwind to an economic recover, slowing the economy, and depressing both deposit and borrowing rates. The longer the shutdown, the stronger this tailwind."

Consumer confidence took a significant hit from the government's, with the guage taking its most significant downturn since the collapse of Lehman Brothers in 2008.

Standard and Poor estimated that the shutdown cost the United States $23 billion. The combination of the drop in consumer confidence and the hit to the economy have slowed growth. All of this serves to prolong the Fed's bond buying and the low interest rate environment we are currently in.

In the past, I've identified 4 factors that will impact the timing and scope of interest rate increases:

• Government & Taxes
• Europe's economic future
• Technology
• General economic baselines (this encompasses consumer confidence)

Any of these can contribute or subtract from growth. Right now, government policies and employment are acting as a drag on the economy.

Still, despite this bump in the road, all signs point to the economy gaining momentum through the end of this year and into next year. I do believe that this economic upturn is real and that rates will continue to slowly rise from this point (even though the Federal government is doing its best to botch the recovery).

So if we look at the scorecard:

• Taxes & Government: Increasing - drag on growth. Negative
• U.S. economic growth: Slow to moderate. A protracted fight on the debt ceiling has hit growth and lowered rates. While this was improving last month this month we'll call it: Neutral.
• Europe and the world: Europe leaving recession; Japan strong growth; developed world slowing but still growing. Overall, world picture is improving. Positive
• Technology: Gas prices at the pump coming down and plentry of natural gas for the cold winter months due to fracking and other extraction innovations. Slightly Positive.

My outlook: The government shutdown and default embroglio have taken some wind out of the economies sales. Still, as long as the politicos are not back at it in 3 months the damange should be relatively short. Short term rates will continue to fall for a bit longer even as longer term rates continue to rise. The Fed will increase the Federal Funds rate within the next 14 months. Savings rates will hover in the 2-3% range by the end of next year.

Savings Accounts or CDs?

The data continues to show that opening a savings account is a better bet than a 1-3 year term CD and I expect this to hold through 2013. Online savings accounts have held the line over the past year and even though CD rates have stabilized and ticked up, the premium is still not enough to jusity locking the money away. While the premium for opening a 5 year CD over a 1 year CD has increased over the past six weeks, it is still only at 0.722 versus over 1 percentage point in October 2011. In a rising rate environment, it does not make sense to tie up money for 5 years with only a 30 basis premium.

Is it worth it to go long and open a 5 year? I don't think so any more. I think the 5 year CD rates are just too low and that you'd be better off putting your "safe" money into an online savings account and waiting for rates to rise. I spoke to one banker several weeks ago who said that "no one was investing in long-term CDs." Keep your powder dry.

For money you want to keep liquid, go with online savings accounts. They offer better rates than 1-3 year CDs and athough several banks have dropped rates in the past month, they have still offered decent rate stability over the past year and a half.

Make the best of a tough savings situation in 2013

Yields may be low in 2013 but a savvy saver can boost the return with no increase in rate by rate shopping. By shopping around, a saver can earn an extra half to full percentage point. On $100,000, that's $1,000 in extra cash per year. Remember, even in today's environment, there is competition for your cash.

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